I recently asked the question of experts on why it is going to take until 2010 to set up an Australian emissions trading system. This is a long time to wait and I was told the reason for the delay is that setting up an emissions permits system is difficult. The major problems are defining the property rights associated with permits, how to issue permits, what to do with the money raised from permits, enforcing the property rights, and understanding the effect of the system on the economy. This is going to take at least two years and at the end of the time we are unsure if it will achieve a reduction in greenhouse gases.

As someone who builds information systems for a living I know that any information system (and an emission permits system is an information system) that takes two years to define is not going to work as expected. An emissions trading system is complex. We know that it is best to build complex information systems incrementally. We start with the simplest possible system that will achieve the minimum usable objective, we build it and see what happens. We learn from our mistakes make incremental changes and allow the system to evolve as we add increasing complexity.

I then asked how the system was going to be tested. I was told that this was done by modelling the system on a computer. Economic computer modelling is done by building a theoretical model on how an economy works. Unfortunately the record of computer models of economic systems is problematic when they include human behaviour. It means we are testing how emissions trading will work with simple computer models not with humans. This is almost guaranteed to give results that will be difficult to trust because human systems are not static computer models. People invent new rules and continually change the systems they use.

My conclusion is that as an information system emissions trading is almost certain to fail and it is unlikely to achieve its objectives of reducing emissions and it will take us at least five years after implementation before we know it is not working. Can we afford to wait that long?

It’s decision day in Texas today so I’ve been posting about the State Capital Austin, home of George W. and LBJ. In 1966 the University of Texas at Austin had the first campus shooting massacre.
That was the year of the “All the Way with LBJ’ election in Australia when Harold Holt trounced the ALP. Please click the link to find more. It also has an odd Australian literary connection.

A new study has found that community-controlled health care has led to lower than usual mortality rates in the Utopia area in central Australia.

The 10-year health study of the region has been published in the latest Medical Journal of Australia.

It looks at why the rate of hospitalisation and cardiovascular disease is lower in Utopia than other Northern Territory communities.

Professor Ian Anderson from the University of Melbourne says the results strongly suggest that self-determination leads to improved health conditions.

“The fact that the community is decentralised, they’ve got good primary health care services,” he said.

“They are able to have a good diet, they can hunt and they’re getting good physical activity and they can have a degree of control over their affairs, so this is I guess really a good news story about things that can be different within communities.”

Colleague Dr Kevin Rowley agrees.

“Control over your life circumstance is good,” he said.

“The process of working with communities and identifying their aspirations and the way to achieve that is the key.”

Kevin, what exactly are you suggesting is the alternative? It has to be tested somehow and computer modeling is the only way to do that. We can’t just deploy an emissions trading scheme into production and see what happens. That approach risks wiping out entire industries, thousands of jobs and billions of dollars in company capital. And that risk doesn’t go away if you deploy the simplest possible system as most of the complexity is added as a means of avoiding obvious problems. A simple system could be the most damaging. Its a mess but the only way to avoid it was to start five years ago.

According to the Oz on Saturday just measuring the CO2 emitted can’t be done by 2010.Emission deadline ‘risk to gas supply’
But ExxonMobil, BHP Billiton and Santos, which together account for about 85 per cent of the eastern states’ gas market, have told the Department of Climate Change they will not be able to install sufficient new measuring and monitoring equipment in time.

“If you added all the work together and did it all at once, it would have a similar impact on production as Longford,” one company official said, referring to the 1998 explosion and fire that resulted in Victorians having cold showers for two weeks. “Even if we had begun putting in this equipment four years ago, we would not meet the 2010 carbon trading deadline.”

The equipment is needed to accurately calculate the level of carbon emissions from gas production so that carbon offsets and trading credits can be determined.
Which makes me wonder why can’t they just estimate the CO2 emitted based on how much gas they’ve burned? Surely they know how much fuel they’re burning!

Seems like the electricity generators are already thinking up excuses.

But ExxonMobil, BHP Billiton and Santos, which together account for about 85 per cent of the eastern states’ gas market, have told the Department of Climate Change they will not be able to install sufficient new measuring and monitoring equipment in time.

“If you added all the work together and did it all at once, it would have a similar impact on production as Longford,” one company official said, referring to the 1998 explosion and fire that resulted in Victorians having cold showers for two weeks. “Even if we had begun putting in this equipment four years ago, we would not meet the 2010 carbon trading deadline.”

The equipment is needed to accurately calculate the level of carbon emissions from gas production so that carbon offsets and trading credits can be determined.

Which makes me wonder why can’t they just estimate the CO2 emitted based on how much gas they’ve burned? Surely they know how much fuel they’re burning!

Seems like the electricity generators are already thinking up excuses.

(sorry for the double-post, but the lack of a preview button on this blog drives me insane!)

some call it a carbon tax but I prefer to call it a surcharge because the money is given back to other consumers. This means there is no change to the GDP because it is a transfer from one group of people to another – it just that they have to spend the money on solving the problem. It doesn’t matter what the tax is even if it is related to the amount of emissions because the critical thing is to get investment in emissions reducing infrastructure through a market mechanism and where the money comes from is relatively unimportant.

To ease inflation why not increase interest rates on any new loans used to purchase a “second hand house” and use the extra money collected to subsidise those who purchase a first time used house.

As Australians currently borrow $20 Billion dollars each month to purchase old houses which does not add to the productive capacity of the nation why not direct some of that borrowing capacity to new houses which will make borrowing for new houses more attractive which will in turn increase the construction of houses which will in turn ease housing prices which will in turn reduce inflation. As there is 10 times as many loans for old houses the surcharge on old house interest rates could be low say .5% while giving new house interest payments a 5% cut. Of course this would adjust as the amount of money for old houses dropped. It is an example of directing expenditure towards more productive uses of funds.

surely emissions are mostly caused by electricity generation, and transport. simply raise the price of oil and coal in a smooth curve and bob’s yer uncle. after a while, emissions will have dropped to target levels. who needs a ‘study’?

Al
You must be an economist. Who else but an economist believes that all you have to do is to increase the price and the market will take care of it. That is not good enough because you want a system that has a positive feedback. You need to direct expenditure to solve the problem (of course using markets to allocate expenditure). That is what is supposed to be the attraction of emissions trading but it is too hard to implement. To see an approach go to rewards.edentiti.com

“To ease inflation why not increase interest rates on any new loans used to purchase a â€œsecond hand houseâ€? and use the extra money collected to subsidise those who purchase a first time used house.”

They do the opposite now with the GST. They levy the GST on “new houses” and they do not levy the GST on “second hand houses”.

This makes new houses 10% dearer than second hand houses, so they can never compete cost wise. This disincentive is curtailing the production of new housing.

Abolishing the GST on new housing production would increase production, by removing this distortion.

New housing manufacture is tax at close to 70%.
see table 6 page 13 Taxes on property development:

kevin, i am not an economist, and i often put money in the poor box, as well. weening people off carbon will only be done with tax or threat of imminent death. i prefer tax. spending the money wisely is the trick. gummint should put a solar cell on every roof, for starters.

the trouble with building new houses, even if green, is it leads to more people. that’s the fundamental problem. i’m against culling old folks, not least cuz i am one, but we should certainly discourage replacement. i suspect capitalism will collapse in a steady state society, so maybe we shouldn’t actually say ‘population stabilization’, just do it. then we can move on to population reduction.

I had not thought about the GST and the article on tax rates for housing is an eye opener. It certainly makes it easy to see how to fix the problem. Put a GST on old housing and reduce the taxes on new housing – simple to do – if you have the political will which is possible as the tax income can still be the same net amount. The trick is to make sure the states really get the GST in return for the reductions in stamp duty.

Which makes me wonder why canâ€™t they just estimate the CO2 emitted based on how much gas theyâ€™ve burned? Surely they know how much fuel theyâ€™re burning!

I imagine that the simplist approach is to apply such a tax based on electricity output times a multiplier for the class of plant (ie gas, black coal etc). With a provision that in a year or two the tax will be based on actual emissions if such verifable data can be made available. So long as the scheduled multipliers are not too genereous there will be an incentive to move towards more accurate measurement.

Of course the revenue raised from taxing the electricity sector should be used to reduce taxes elsewhere. I’d prefer to see it used to cut petrol taxes. That way it would essentially be a broadening of an existing carbon tax rather than a new carbon tax.

Spending the revenue raised on anything other than infrastructure to reduce greenhouse gases is unlikely to have much effect as the whole purpose of the tax is to reduce emissions. It is best to give the tax back to consumers provided they agree to spend the money on greenhouse reducing infrastructure. We would suggest giving the money back to people whose lifestyles produce few greenhouse emissions. You can see more details at http://cscoxk.wordpress.com/2008/03/03/the-idea-of-emissions-trading-has-a-c/

When this is done we will have a system that

1. Does not alter the GDP of the country because it transfers funds from high consumers to frugal consumers and is socially equitable but does not change total consumption.
2. Is non inflationary.
3. Does not increase the total taxes collected by the government as it is a transfer of funds from one group to another.
4. Is guaranteed to reduce emissions and at whatever rate the government decides and do it at a compounding rate because the system has a positive feedback loop.
5. Is self regulating as the amount spent reduces as greenhouse emissions reduce
6. Uses market mechanisms to allocate resources so the money is spent in the most efficient manner to reduce emissions.
7. Is easy and simple to monitor and effect compliance.
8. Can start almost immediately.
9. Is easily replicated across the globe and can be implemented so it does not impact Australian industry competitiveness.
10. Is remarkably low cost in terms of implementation (a fraction of one percent of the money spent if the amount spent is large). In other words the system is scalable.

It does not “compete” with emissions trading and emissions trading can still go ahead if the claims above prove to be untrue.

Too good to be true? Think about it and see how directed expenditure can be used to handle any “community expenditure” via markets at http://rewards.edentiti.com

Can’t be built? We have all the components built and either operating or as working prototypes. We could have a system deployed within two months. We are confident enough to build it, implement it and operate it for no cost to the government. We get paid from low transaction costs to move the money around.

That could boost the supply of housing side of the equation and presumably alleviate inflation in that way, but does levying a tax on an item make it more expensive and thus contribute to inflation also? Aside from the fact that housing manufacture is taxed at nearly double the tax rate of the manufacture of other goods.

Housing is an essential and fundamental economic need.

MH
Lovelock is very interesting indeed.

“he fears we won’t invent the necessary technologies in time, and expects “about 80%” of the world’s population to be wiped out by 2100″.

“Enjoy life while you can. Because if you’re lucky it’s going to be 20 years before it hits the fan.”

Al Loomis said;

“the trouble with building new houses, even if green, is it leads to more people. thatâ€™s the fundamental problem”

If enough green houses were built to house 1 person per house, wouldn’t that curtail procreation?

Old houses will become more expensive but we are told that taxes are not inflationary as they only tranfer money to the government. I agree removing the extra taxes on housing compared to other manufacturing is also sensible.

Mind you I think the economic measurement system is fundamentally flawed and economic modelling is inaccurate. One problem is that all money no matter why created or how spent is deemed to be “equal”. This leads to the patently ridiculous conclusion that borrowing money to buy cigarettes will increase the GDP by the same amount as borrowing to build new houses and hence we are just as wealthy if smoke a lot than if we build a new house. It also means that the banks continually pressure me to increase my credit card limit and do it whether I want it or not but will not give my small business a loan without me taking out a mortgage on my house.

MH

Lovelock is wrong. We have all the technologies we need. It is just a matter of directing expenditure towards the goal in an efficient manner. Given the procedure I suggest above my back of the envelop calculations show that we could have zero net emissions in ten years and be taking gases out of the atmosphere perhaps in time to reverse the melting of Antartica.

The point of a carbon tax should not be to raise new revenue or to pick winners and subsidise them. The point should merely be to place a price on CO2e emissions which will provide the necessary investment incentive for energy alternatives in and of itself. If coal becomes a more expensive way to make electricity then cheaper alternatives will be commercialised. Investors are not stupid.

“Spending the revenue raised on anything other than infrastructure to reduce greenhouse gases is unlikely to have much effect as the whole purpose of the tax is to reduce emissions. It is best to give the tax back to consumers provided they agree to spend the money on greenhouse reducing infrastructure. We would suggest giving the money back to people whose lifestyles produce few greenhouse emissions.”

Basically omniscient Kevin would like to give our taxes to Aboriginal hunter gatherers or perhaps greener meat eaters-http://www.news.com.au/story/0,23599,23316324-23109,00.html
The world is full of Kevins who always know what’s best for us all. Of course is this wasn’t just another power grab by all the Kevins, and CO2 was the greatest threat to mankind since George Bush, they could easily instal a constitutional marketplace where all revenue was gathered via fossil fuel taxes and let the market run. You wouldn’t need econometric models to work out what a dramatic change of investment/consumption patterns that would produce, but then that’s not really the object of the game here.

1. Some gas is lost to the atmosphere as vagrant emissions. Natural gas is mostly methane and if leaked into the atmosphere has about 50 times as much warming potential as carbon dioxide released by burning it. Losses can be 1% or more of total volume of gas processed.

2. Some gas plants (i.e.e Kwinana in WA) process natural gas to make ethylene and other organic chemicals. So volume of gas processed isn’ the same as volume of gas burnt.

I am not sure of the point you are making. Are you claiming that the proposal will not increase GDP? Are you claiming that burning fossil fuel is less costly than renewable energies. If so then please explain why if the running cost of a thermal solar plant or geothermal energy plant is half the cost of fossil fuel plants we will be worse off?

Major reasons we do not have renewables producing most of our energy today is a failure of the energy markets caused by inbuilt bias to fossil fuel systems and because of the strange accounting rules that mean that spending money on cigarettes is as “valuable” as spending money on infrastructure.

This is not a conspiracy or anything like that. It is failure to apply systems thinking to the problem and to rely on the existing flawed economic models which have brought us the prime loan crisis and increasing inflation and unaffordable housing in times of prosperity. Of course the existing systems are flawed and it would be a brave person to claim otherwise. The suggestions being made are simple affordable tweaks that keep the current system and can fix the problems.

On the subject of when can we introduce an emissions trading scheme, whether you have a carbon tax or cap-and-trade, the central issue of getting information remains the same. The National Greenhouse and Energy Reporting Bill 2007 addresses this issue and the first reporting period will be 2008-2009. I therefore think we could easily introduce emissions trading by mid 2009. By having it start with emitters with emissions over 20 kT CO2-e, it should start off reasonably simple.

As far as what to do with the money raised from auctioning permits, about 20% of emissions are from the residential sector including electricity and transport, so a minimum of 20% of money raised should be used to compensate low income households. The remainder should be spent on RD&D and reducing and reversing emissions in the land use and forestry sectors. This is because emissions from land use are hard to measure, but easy to reduce. If money is allocated to activities like biodiversity plantings, this will provide valuable information on how much emissions are offset by such activities (effectively being a form of RD&D) as well as having biodiversity cobenefits.

Given the climate change issues, who could argue that further subsidies to fossil fuel industry are anything but madness? Yet Australia continues to throw billions in subsidies to the fossil fuel industry and to spend next to nothing on renewable energy R&D. This was the picture in 2007 and there has been no substantial change since.

Calculating emissions is unimportant in the system proposed as an alternative to emissions trading. You do not have to be “exact” because the important thing is where the money is spent and the amount of money spent. Give money to people whose lifestyles cause few emissions (mainly the low income) but require them to spend the money on ways to reduce emissions. They can of course sell the money if they have no idea what to do with it but the money has to be spent sooner or later on reducing emissions.

Distribute some of the money for R&D through a competitive process. However we don’t need much R&D as we already have the technologies to reduce emissions to zero or less for low cost.

There are many ways that people can build infrastructure to reduce emissions and anything that looks reasonable can apply to be considered. If it is found that the infrastructure is a scam and does not reduce emissions then the proponents are banned from the system.

The name of the game is investment not increasing prices because investment is the only way to solve the problem. However it is too hard to pick where to invest and hence we need a market in infrastructure to do the allocation.

I actually proposed using electricity output as a proxy, not the quantity of gas input, however I do see your point. I imagine though that there is already a significant economic incentive to avoid leaks and proxy measurement would only be an interum measure. What is better a proxy tax or no tax?

Of the $10 billion, $7 billion is in subsidies for fossil fuel based transport because more money is spent on roads than is raised through petrol excise. $1-2 billion is in subsidies for coal. Indirect subsidies through not taxing external costs such as climate change are not considered.

Of the $10 billion, $7 billion is in subsidies for fossil fuel based transport because more money is spent on roads than is raised through petrol excise.

By this daft analysis, if people drove electric cars powered by solar energy, it would be a $7B solar energy subsidy. Why isn’t it a $7B steel subsidy (after all, most fossil fuel based transport is made out of steel)? Or a $7B rubber subsidy (tyres are made of rubber)?

And to think the Australian taxpayer funds the idiot academics behind this study.

I must question the studies claiming a “$7bn subsidy on roads”. This claim is just false and misleading. For starters it only considers one component of the taxes and charges on transport. What about registration fees? Or vehicle sales taxes/GST? Or import tariffs and fuel duties? Roads are not subsidised except in some rural areas without mining. In fact urban roads are a great source of income for government, that is why they much prefer to build tollways than train lines. That is the problem – PT needs subsidising by government hence we underfund it.

I wish to make clear that I am in favour of carbon taxes and using the money to fund public transport. That is still the right answer from an economic/total community cost viewpoint. But lets have realistic numbers please.

1. I don’t understand your statement: “Calculating emissions is unimportant in the system proposed as an alternative to emissions trading.” What does the expression ‘emission trading’ mean to you?

2. I find your statement: “However it is too hard to pick where to invest and hence we need a market in infrastructure to do the allocation” quite amazing. You seem to assume that the idea of a ‘market for infrastructue’ makes sense. What is your notion of ‘infrastructure’? What is your notion of ‘a market’?

Re: #1. While I would agree that emission prices (and taxes) have a function in an economic system that is akin to that of information system, I don’t think it therefore follows that knowledge about the development of informtion systems which do not involve humans but are controlled by humans are helpful in shedding light on the nature of the problem. Economics is concerned with the material (physical) welfare of humans. It seems to me you are offering a solution to a problem we don’t have but none for the problem we do have.

1. I wanted to emphasise that the problem is an investment problem more than an emissions reduction problem and so that is why it is not all that important to be able to accurately calculate emissions. Emissions trading means emissions permits trading. That is, we trade permits to pollute. The reference is Tietenberg – “Emissions trading – principles and practice”

2. We already have a gigantic market for infrastructure on ways to reduce emissions and it is going quite well. It consists of investing to build solar thermal plants, insulate your home, build public transport systems, etc. The issue is getting even more money into that market. What we propose is a direct way of getting money into that market – not an indirect way as used in emissions permits trading or carbon credits. Note it is not a market in energy but a market in infrastructure that will reduce emissions.

#1 I see the physical and material welfare of humans as an emergent property of an economic system not as the system itself. One way of thinking about an economic system is as an information system that enables humans to exchange information about the value of goods and services. When you start looking at an economic system this way you get different insights. For example we know that building information systems is best done incrementally and that you can never fully design a complex information system involving human interaction but you build them to evolve and you direct the evolution in ways that work best. It also turns out that an economic information systems look remarkably like an evolutionary information system. This means that the best tools to model economic systems are probably similar to the best tools we use to model evolutionary systems and at the moment these turn out to be best done by modelling at the individual transaction level. The example I like best is modelling an ant colony. To model an ant colony you model the transfer of information each ant passes to other ant. It turns out that you can very accurately model the behaviour of ant colonies under all sorts of external shocks (e.g. someone destroys an ant trail with insecticide) using this method. We can model the economic behaviour of an ant colony in the way it optimises the collection of food. If you can successfully model the economic behaviour of an ant colony just by considering the information transfer between ants why not model the economic behaviour of humans by modelling the transfer of economic information between humans when they trade? It turns out that you can and you can use the models to predict what will happen when the system gets external shocks (like global warming).

The next step in this line of thinking is that if your models work well by considering transfers of information in trades then that is the area you need to look at for finding solutions to complex problems. That is look for a “fair trade” in the way we use community goods because that is the problem we are trying to solve (The tragedy of the commons). Hence that is why I had the idea of paying frugal people who were low consumers of a common good but as part of the trade requiring them to spend the money they obtained on increasing the common good. It then becomes a “fair” trade. If we do this then what happens?

My apologies for going down this trail but you can see why it is difficult to try to explain what I am talking about because the models I have in my head are quite different from the models that people trained in economics have in their heads.

Economic thinkers seem to think in terms of moving from one steady state to another. That is you have an economic system that is in balance and if you change one part then there will be a change in another part until the whole system returns to a stable state. Thus if we reduce emissions then we will get a change in the economy such as higher prices of energy that will be needed to bring the whole system back into balance.

Evolutionary thinkers think quite differently. They think of an economic system much more like an ant colony with people exchanging information at an individual level and things like reductions in emissions as an emergent property of the totality of the individual trades. I postulate that if we make fair trades as explained above then the emergent property will be a reduction in emissions and depending on the amount of money given to the frugal we can calculate the reduction in emissions.

On the bright side if I am right my back of the envelop calculations estimate we can have zero emissions in Australia with more wealth for all in ten years time. My modelling says that renewable energy rather than being a drag on the economy will make it grow more that if we stay on fossil fuels. The underlying reason? Excluding capital costs the running costs of a solar thermal or geothermal plant is currently half the running costs of the best coal plants and the gap is widening.

“The WP asserts that the Review `draws heavily on studies that have a more pessimistic view on climate change and its impacts, and gives little attention to more optimistic views.’ If anything, the opposite is true. In retrospect, the Review could be criticised for being overly optimistic in each of the four steps linking human emissions to climate change: (i) future emissions growth, (ii) the carbon cycle linking emissions (flows) to concentrations (stocks), (iii) the climate sensitivity, linking concentrations to temperature increases, and (iv) damages from a given temperature increase.”